Squeezed middle are burdened by non tax-paying lower earners

THE business of the next week-and-a-half is budget making, writes Gerard Howlin

Squeezed middle are burdened by non tax-paying lower earners

By Friday week, nearly everything will be settled, if it can. What hangs over, over the last weekend, will be political high-wire stuff. The challenge for Government is to get a budget — any budget — through and survive. The challenge for Fianna Fáil is to facilitate the process and lend its support without leaking political capital.

Arguably, leakage has begun for Fianna Fáil. Opinion polls, albeit within the margin of error, show slight slippage or at least an interruption of an upward trajectory unchecked since the general election campaign.

It is tempting to think this is comeuppance for an opportunistic U-turn on water charges and an inadequately calculated demand for €5 increase in the old age pension. All economics now as in the age of Adam Smith is ‘political economy’. Political decision-making is a complex, but not fastidious process, of calculating what works economically and wins politically. The line between those two is frequently blurred.

There is an adage about those who shout the loudest commanding the most attention. There is certainly an ingrained narrative about policy that helps the least well off, first or exclusively, being the only good policy. Opposed to it, are ‘bad’ or ‘regressive’ measures that do not further progress Ireland’s already astonishing record of progressivity on tax and redistribution.

Across the OECD only Israel has a more progressive tax system and we are ahead of countries such as Sweden, France, and Denmark. We have nothing to beat ourselves up about in relation to using our income tax system as a means of redistributing wealth and paying for public services.

Our tax system is an old mattress with a hollow in the middle. At either side are a lot of people who pay either a lot less or earn a lot more. On one side, those at the top do pay a lot more in one sense. As instanced by the Irish Tax Institute someone on €100,000 earns 5.6 the amount of a person on €18,000 but pays almost 66 times the amount of tax.

Since 2012 those on more than €75,000 have been paying proportionately more in tax. So on tax, those with more, have been paying more proportionately. What this doesn’t factor in, is what other wealth is generated at those levels of pay. Investments in pension and home improvements for example both ultimately generate a return. Let’s assume those at the bottom are not doing much of either.

Nonetheless, there is now an astonishing situation where 862,000 people or 36% of income earners are exempt from income tax entirely; 703,800 or 29% are exempt from USC.

In other words, we have created a political echo chamber where the assumed interests of about one-third of income earners, who make no direct contribution to the exchequer out of income earned, are setting the pace politically on a whole range of issues including water especially, and narrowing the tax base more particularly.

This has happened in a context where it is taboo to talk about the justice of everybody paying something directly from income. The water protest movement, inarguably highly successful, is predicated not on the principle that “we won’t pay” but on the unspoken fact that under our tax system, the burden of everything paid from general taxation falls exclusively on two-thirds. Of those, the one-third in the middle, is in the hollow of the mattress, and that is not a comparable place to be.

Narrowing the tax base by not pursuing water charges or by further raising minimum limits for liability for USC, effectively puts the greatest proportionate strain on disposable income as distinct from earned income, on the squeezed middle. Give or take, those are the 1.2 million earning more than €30,000. Of those, those on below €75,000 are much less able to use the tax system to pay for pension contributions or private health insurance.

A €5 per week increase in the old age pension, obviates a whole range of other spending choices. It would cost €150 million out of a possible spending package of €750 million. Worse than not being good economics, there are signs it is a political mistake, which in turn is part of a fundamental political misunderstanding.

I get the politics of the ‘grey vote’. They are ever more and they turn out. Arguably €3 now with a promise of more would have had the same purely political value, but left more political credibility intact. Instead Willie O’Dea floated a balloon that Micheál Martin didn’t pop. Coupled with abandoning water charges and a lack of straight-talking on how third-level is to be funded, and you have a good imitation of the mess Fine Gael made for itself on the eve of the general election.

Fianna Fáil’s gains at the local elections in 2014 and the general election this year were ‘facilitated’, to use now preferred political terminology, by mess-making on an epic scale by Fine Gael. At the general election Micheál Martin stood back and said his party was not joining the auction to scrap USC. He reaped the reward of political credibility. Strangely since then, on key economic calls, the main opposition party have been beaten like farm-fed pheasants into the air by the discordant noise of a far-left, for which ultimately they will reap no reward. That’s just the political calculus. The economics are a zero sum game.

Regrettably, there is very limited scope for tax cutting and even if there were, given upward pressures in the economy, better not. What there is scope is for is widening the tax base, which in turn would allow for reduction of tax rates. It is a great pity that the entry point for USC was actually increased from €4,000 to €13,000. It is not just income for services forfeit, it is the principle that everyone pays something.

Nonetheless, by raising the threshold no further, some of that can be ameliorated over time. In parallel there should be a root and branch re-examination of all that astonishingly nests within the apparently innocent zero — that is the zero rate of VAT. Buy white candles; they are zero-rated. Churches you see, use them, though if you look closely some have fake church candles with tea lights sitting inside.

Prefer red for your candle-lit supper? That’s 23% please. Need bread and potatos to live, understandably they’re zero-rated. Prefer lobster served with bread suffused with truffle oil; don’t worry. That’s zero rated too. Ever had to listen to nonsense about zero-rated hurleys and condoms? It is the bar stool side of the same argument. Swathes of what we have a choice on whether to purchase or not, is exempt from VAT. It’s nonsense. So is not having a user pay charges for water. So is saying it’s OK for about a third of the population to make no direct contribution to the State.

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Wednesday, April 21, 2021

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